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© Islamic Development Bank, 2007 Islamic Research & Training Institute First Published 1427H (2007) Islamic Research and Training Institute P.O. Box 9201, Jeddah 21413, Saudi Arabia. e-mail: [email protected] King Fahad National Library Cataloging-in-Publication Data Ali, Salman Syed, 1961− Islamic Banking and Finance: Fundamentals and Contemporary Issues / Salman Syed Ali and Ausaf Ahmad. 306 + (x) p.; 24x17 cm. − Jeddah 19143. Includes references and glossary. ISBN 9960-32-162-2 1. Finance – Islamic. 2. Banking – Islamic. 3. Law – Financial 4. Financial Service Industry – Islamic. I. Ahmad, Ausaf. II. Title III. Conference Proceedings 332.121 – dc20 The views expressed in this book are not necessarily those of the Islamic Research and Training Institute of the Islamic Development Bank or the Universiti Brunei Darussalam. References and citations are allowed but must be properly acknowledged. iv Contents Foreword vii Acknowledgements ix An Overview 1 Salman Syed Ali and Ausaf Ahmad Fundamentals 1 Islamic Banking and Finance: Philosophical Underpinnings 13 Mabid Ali Al-Jarhi 2 The Case Against Riba: Is It Compelling? 25 Umer Chapra 3 Option Contracts and The Principles of Sale of Rights in Shari[ah 51 Mohammed Burhan Arbouna 4 Unresolved issues in Islamic Banking and Finance: Deposit 81 Mobilization Sayyid Tahir 5 Financial Distress and Bank Failure: Relevance for Islamic Banks 99 Salman Syed Ali Contemporary Issues 6 Factors of Success of Islamic Banks: An Empirical Study 121 Monzer Kahaf v 7 The Attitude of Bank Customers and Professional Bankers 169 Towards Islamic and Conventional Banks in Bangladesh Mahmood Ahmad 8 Equity Fund’s Islamic Screening: Effects on its Financial 197 Performance Abul Hassan and Antonios Antoniou Legal Issues 9 Legal Aspects of Islamic Banking—Malaysian Experience 215 Norhasima Yassin 10 Legal Aspects of Islamic Project Finance and Asset Securitization 239 in Indonesia: A Vehicle for the Development of Islamic Banking Reza Adirahman Djojosugito 11 Islamic Bonds; Indonesian Experience 261 Cecep Maskanul Hakim History and Training Issues 12 Islamic Banking in Brunei and The Future Role of Centre for 277 Islamic Banking Finance and Management (CIBFM) Hjh Salma Hj Abdul Latiff Glossary 301 vi Foreword Islamic finance is growing in various parts of the world. It has moved from a mere theoretical concept to a practical reality. A natural consequence of this progress is the opening up of new challenges as well as more avenues for its advancement. Islamic finance is therefore confronting some new and some old, but re-formulated, challenges on the intellectual and practical plains. On the intellectual side, refinements in the philosophical underpinnings of the Islamic finance and the financial system are the core issues. While on the practical side, the diversity of regulatory, supervisory and legal environments faced by Islamic financial institutions; the issues of a proper accounting framework; corporate governance; and making available of a complete spectrum of Islamic financial products have evolved as some of the new challenges. These challenges require going back and forth between the drawing board and the reality. Consequently, this approach is reflected in a good number of conferences and research assignments undertaken by IRTI. The present volume is a collection of selected papers from a conference jointly organized by IRTI and Universiti Brunei Darussalam in 2004. The conference was unique in its inclusion of some educational lectures on Islamic law (fiqh) of finance for orientation purpose along with sessions devoted to presentation of research papers in Islamic banking and finance. Both categories of presentations were important in their own right. However, the editors felt that the information content of the first category (the orientation lectures) will find its own currency and circulation because lectures by nature are repeated and their information content shared more widely. It is the research papers category that may need support of editing and publishing for broader circulation and knowledge preservation. The editors have therefore put together mostly this second category of papers in this volume. I hope that the readers will find these useful; and that the papers will help in creating further knowledge in the field. Bashir Ali Khallat Acting Director Islamic Research and Training Institute vii viii Acknowledgements We would like to acknowledge the joint efforts of IRTI and Universiti Brunei Darussalam in organizing the conference which generated these papers. Particular thanks to Ms. Hjh Salma, Dr. Shamim Siddiqui and other members of the local Organizing Committee from Universiti Brunei Darussalam who were responsible for the local arrangements. We also like to acknowledge with appreciation the Academic Committee of the conference comprising of IRTI and UBD staff who refereed the large number of papers submitted for the conference. Most importantly, thank is due to all the authors who contributed with their papers to the conference. We also acknowledge with thanks the tedious work of Mr. Sajjad Qurban, Mr. Amanul Hoque, Mr. Mohammad Asiri and many others at IRTI who helped us at different stages of typesetting and final production of this volume. ix x